In Massachusetts, retailers’ cookies will soon lead to sales tax

A cookie is a kind of property in a location.

That statement, if maintained, could usher in a sea change in how online retailers tax users.

On July 1, the state of Massachusetts will begin enforcing a new directive from its Department of Revenue. It says online retailers must charge the state’s sales tax to customers in the state, if the retailers deposit or utilize a cookie — or a mobile app — on its customers’ machines.

Cookies, of course, are small text files that act as markers, letting a retailer know, for instance, that you looked at blue pants the last time you were on the site so it can personalize content the next time — even if you don’t log in.

Generally speaking, online retailers have not had to charge sales tax to their out-of-state customers, a pricing advantage compared to physical retailers in the 45 states that have sales tax. Federal rules say that retailers only have to charge sales tax if they have a physical presence in the state, such as a brick-and-mortar branch or a warehouse.

Matt Walsh, principal of indirect tax at Wilmington, Massachusetts-based tax compliance firm Sovos, told me that Massachusetts’ new Directive “is the first time a cookie is being used to declare physical presence” for sales tax.

He added that this approach is “brilliant.”

Walsh pointed out that a couple of states — South Dakota and Alabama — require online retailers to charge sales tax if they have a certain volume of sales — $500,000 or 200 transactions in the case of South Dakota. But those laws are on hold because of court challenges.

Massachusetts also has a similar revenue/transaction requirement in its new directive, but the Bay State has gone one step further.

Retailer apps and retailer-generated cookies, the state says, are property. Having battled for years to protect their software as intellectual property, it’s likely few online retailers are prepared to challenge that.

So, if a retailer deposits or revises a cookie on a Massachusetts customer’s computer or mobile device, the state says, or has provided a downloaded app, it has established a presence of property in the state — and must collect sales tax. A customer’s location is defined by where the product is shipped.

Per the Directive:

Cookies are not software but as in the case of software are present in the state and serve to facilitate such vendor’s in-state sales. Large Internet vendors store cookies on their customers’ computers and communication devices when the customers visit the vendor’s website.

Included are both temporary session cookies and persistent ones across browser sessions.

While the Directive mentions “communication devices,” it doesn’t directly address whether the less-common use of cookies on mobile devices gives retailers an opening there. But, of course, a retailer’s app on a mobile device would seem to qualify.

At any rate, cookies may now become more than simple tracking tools. They may become the hooks that pull retailers into states’ tax systems.